CHAPTER 3

BA II Plus 2 . 9 Enter Financial Statements, Cash Flow, and Taxes
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Balance sheet Income statement Accounting income vs. cash flow MVA and EVA Federal tax system

The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time.

Income statement – summarizes a firm’s revenues and expenses over a given period of time.

Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends.

Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.

Balance Sheet: Assets Cash Accounts Receivable Inventories Total Current Assets Gross Fixed Assets Less: Depreciation Net Fixed Assets Total Assets 2012 7,282 632,160 1,287,360 1,926,802 1,202,360 263,160 939,790 2,866,592 2011 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800

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468.948) 136.640 87.672 209.176) 2011 145.11 2.568 723.960 100.000 100.000 32.6 to find taxable income.768 1. Its operating income Income Statement (EBIT) was $6 million.800 2011 3.T) = 0.600 323.600 58.592 492.528.000 358.000 2.000 481. & Amort.328 18.25 40.768 663.50 40.8 million 2 .600 200.900 190. recently reported net income of $3 million. EBT Taxes Net income Other data No.000 1.592 2012 6.000 5.Accts payable Notes payable Accruals Total Current Liabilities Long-term debt Common stock Retained earnings Total Equity Total L & E Income statement Sales COGS Other expenses EBITDA Depr.866. of shares EPS DPS Stock price Lease pmts Liabilities and Equity 2012 544.5 million and $1.000 203.960) (106.034.000 519.] 2.012 (266. Pearson Brothers recently reported an EBITDA of $7.160 636.808 489. and the company pays a 40 percent tax rate.22 8.88 0. EBIT Interest Exp. What was the company's interest expense for the year? [Hint: Divide $3 million by (1 .864.592 2.988) 116.784) (160.432 460. Little Books Inc.432 460.000 136.000 -1.602 0.960 (130.600 1.988 (13.428 43.828 146.432.000 0.650.

768 (160. reported $50 million of net income and $810 million of retained earnings.948(1 – 0.042 + $939.042 = - Current Assets (cash + Acct Rec + Inv) NOWC11 = $842. The company has $2. Statement of related earnings In its most recent financial statements.592 3.282 + $632.176) (11.600) = $893.948(0.360) – ($544. its balance sheet showed $780 million of retained earnings.000) 32.832 3 .832. What was the company's depreciation and amortization expense? Statement of Retained Earnings (2011) Balance of Retained Earnings 12/31/11 Add: Net Income 2012 Less: Dividends paid Balance of Retained Earnings 12/31/12 $203.4) = -$130.0 million of interest expense and the corporate tax rate is 40 percent.160 + $1.287.257 What effect did the expansion have on net operating working capital? NOWC Non-interest bearing Current Liabilities (Acct pay + Accruals) NOWC12 = ($7.Income statement of net income.569 NOPAT11 = $114.790 = $1.400 What effect did the expansion have on operating capital? Operating capital = NOWC + Net Fixed Assets Operating Capital12 = $893.160 + $489. The previous year. What were the total dividends paid to shareholders during the most recent year? Did the expansion create additional net operating profits after taxes (NOPAT)? NOPAT = EBIT (1 – Tax rate) NOPAT12 = -$130.6) = -$78. Newhouse Inc.

000. What is the company's approximate net cash flow? Assume the firm has no amortization expense. OCF12 = NOPAT + Dep = ($78.000. What are its net income. Klaven is 100 percent equity financed. and its operating cash flow? Economic Value Added (EVA) EVA = After-tax Operating Income __ After-tax Capital costs = NOPAT – After-tax Cost of Capital (Operating Capital) EVA Concepts In order to generate positive EVA. its net cash flow.157 5.216 NCF11 = $87.200 What is your assessment of the expansion’s effect on operations? What effect did the expansion have on net cash flow and operating cash flow? NCF12 = NI + Dep = ($160. The company's Net cash flow depreciation expense was $500. The Klaven Corporation has operating income (EBIT) of $750. The company's Cash flow depreciation expense is $200.187. which includes the cost of equity.Operating Capital11 = $1.960 = $38.1 million.  EVA takes into account the total cost of capital.176) + $116. a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital.569) + $116. and it faces a 40 percent tax rate.960 + $18.900 = $106.391 OCF11 = $114. What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital  4 .900 = $133. Kendall Comers Inc.257 + $18. recently reported net income of $3.960 = -$43. Assume that the firm has no amortization expense.860 4.000.

000. Bailey Corporation recently reported the following income statement (dollars Cash flow are in thousands): Sales $14.000 EBIT $ 4. a.268 -$316.000 Interest 1.257 – (0. What is Kordell's EVA? 7.10)($1.569 .000.000 Operating costs excluding depreciation and amortization 7. What is Bailey's EVA for the year? Did the expansion increase or decrease MVA? MVA = Market value __ of equity Equity capital supplied 5 .832) -$78. What is Bailey's net cash flow for the year? c.000.000 EBT $ 2.837 EVA11 = $114. What is Bailey's NOPAT for the year? b.000 Depreciation and amortization 3.000 EBITDA $ 7.000.187.000 Taxes (40%) 1.13)($1.500.832. The company's after-tax cost of that capital is 11.000.was 10% in 2011 and 13% in 2012.$118. EVA Kordell Company recently reported $170.463 6.000 in operating income (EBIT). What is Bailey's operating cash flow for the year? e.000.257 .500.000 Bailey's total operating capital is $20 billion and its after-tax cost of capital is 10 percent. EVA12 = = = = NOPAT – (A-T cost of capital) (Operating Capital) -$78.$238.625 percent.569 – (0.500.000 Net income $ 1.200) = $114.720 = -$4. and the company is in the 40 percent tax bracket.000. The company's total operating capital is $800.

000 Marginal Tax Rates 15% 25% 6 . and its Market Value Added (MVA) is $130 million. = Change in NOWC + Change in Operating Long Term Assets (less depr) Free Cash Flow = NOPAT – Net Investment in Operating Capital Total Operating Assets = NOWC + Oper LT Assets (ex.  Also subject to state tax (around 5%). These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? Federal Income Tax System Corporate and Personal Taxes  Both have a progressive structure (the higher the income.750 of sales.75. the higher the marginal tax rate). and $1. How many shares of the company's stock are currently outstanding? Free Cash Flows Free Cash Flows = OCF – Gross Inv in Operating Capital Gross Investment in Oper Cap = Net Inv in Oper Cap + Depreciation Net Inv in Oper Cap. the firm had expenditures on fixed assets and net working capital that totaled $1. $5.000 .  Corporations  Rates begin at 15% and rise to 35% for corporations with income over $10 million.500 of operating costs other than depreciation. Henderson Industries has $500 million of common equity on its balance sheet. The company's current stock price is $60 per share. The company had $3.8. Taxable Income $0 .250 of depreciation.550. Investment in Plant and Equipment) . Shrives Publishing recently reported $10.000 50.25% interest rate.500 of bonds that carry a 6. and its federal-plus-state income tax rate was 35%.50. During the year.

000.000. dividends received from other corporations are largely exempt from taxation for a corporation Corporate Tax Rate: Average versus Marginal Tax Rates 1. the tax code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future.15. This means that dividends received by individuals are taxed twice – legislation may change this.333.  Dividends paid – paid out of after-tax income.  Dividends received – taxed as ordinary income for individuals (“double taxation”).10.000. Average tax rate: Marginal tax rate: Total taxes paid Total taxable income amount of tax payable on the next dollar earned - Tax treatment of various uses and sources of funds  Interest paid – tax deductible for corporations (paid out of pre-tax income).000 34% 10.75.100.333. To avoid triple taxation.000 .335.333 38% 18.  Interest earned – usually fully taxable (an exception being interest from a (muni”). but usually not for individuals (interest on home loans being the exception). in order to avoid “triple taxation”.000 . Capital gains – defined as the profits from the sale of assets not normally transacted in the normal course of business.000 . Corporations face somewhat different rules. and at the capital gains rate if held for more than a year.000 .000 39% 335.000 .18.000 34% 100. A portion of dividends received by corporations is tax excludable.333 + 35% Taxes Corporations pay taxes at the corporate income tax rate Taxes are paid by individuals on dividends received by them that are paid out from net income.  Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely.000.  7 .000 35% 15. 2. capital gains for individuals are generally taxed as ordinary income if held for less than a year.

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